In this Blueprint, Bruegel Resident Fellows Zsolt Darvas, Jean Pisani-Ferry, Andre Sapir and their co-authors Torbjörn Becker, Daniel Daianu, Vladimir Gligorov, Michael A Landesmann, Pavle Petrovic, Dariusz K. Rosati and Beatrice Weder di Mauro argue that in view of the depth of integration in Europe, the development model of the central, eastern and south-eastern Europe (CESEE) region, despite its shortcomings, should be preserved. But it should be reformed, with major implications for policymaking both at national and EU levels. If so, what are the required changes? Bruegel and The Vienna Institute for International Economic Studies (wiiw) cooperated to form this expert group of economists from various European countries to research these issues.

This report examines the impact of the economic crisis on the countries of central and eastern Europe (CESEE) and draws out the main policy lessons. Until the crisis hit, CESEE countries had been pursuing a distinctive model of growth and catch-up through integration with the European Union, although not all countries had achieved the same level of integration with the EU. The crisis was a major challenge for the policies pursued in many CESEE countries, and the region was hit by the crisis much harder than other parts of the emerging world, and is also recovering more slowly. In chapter 1, we compare the pre-crisis development model of the central, eastern and south-eastern Europe (CESEE) region with similar countries in Asia and Latin America and study the impact of the crisis. We highlight that the CESEE growth model was fundamentally different from models in other emerging country regions, but also that it had two variants. The first, which characterised most central European countries, was by and large appropriate and sustainable. But there is a second group of CESEE countries (we call it the Baltic-Balkan group) in which the same overall growth model led to widespread misallocation of resources and unsustainable growth trajectories. These countries are undergoing a much more painful recovery from the crisis. In chapter 2 we scrutinise more closely the growth model of the region. We study the short-run challenges and the medium- to longer-run issues, focusing on behavioural adjustments occurring within the countries of the region in the wake of the crisis and on changes in the external environment. We discuss policy issues to make the re-oriented growth model sustainable and successful. Chapters 3, 4 and 5 examine three key policy areas: exchange-rate policy, financial stability and fiscal sustainability. We identify a strong role for exchange-rate policy both in the unsustainable pre-crisis developments of a number of countries and in their dramatic response to the crisis. However, concerning the other two main policy areas, it is true more generally that even more conservative domestic financial regulation and supervision and fiscal policy could not have crisis-proofed those CESEE countries which, even before the crisis, had double-digit current-account deficits. Looking forward, improving supply side conditions and competitiveness will be a key challenge for most countries in the region. Massive cross-border holdings in CESEE banks pose significant challenges to financial regulation and we highlight a large number of unresolved issues, while for fiscal sustainability we are cautiously optimistic, but certainly more optimistic than most analysts who call for overly strict, and hence pro-cyclical, fiscal policy. In our concluding chapter 6, we raise policy issues for the CESEE countries and the EU. The general conclusion is that the benefits of EU integration for countries that are catching up are conditional on the quality of national policies and of the EU framework itself. In both respects we point out past failings and suggest strategic improvements. Reorienting the growth model in those countries that entered a shunt-line before the crisis will be hard because of their legacies, but that there is no other path to follow in order to make the EU’s eastern enlargement a lasting economic success story.

Michael Landesmann

Michael A. Landesmann is Scientific Director of the Vienna Institute for International Economics Studies (wiiw) and Professor of Economics and Head of the Institute for Economic Theory and Quantitative Economic Research at the Johannes Kepler University, Linz. Previously he was at the Department of Applied Economics of the University of Cambridge and was a Fellow in Economics at Jesus College, Cambridge. He holds a DPhil in economics from Oxford University. He was a member of the Economic Analysis group under the chairmanship of former European Commission President Romano Prodi. He currently (academic year 2010-11) holds the Pierre Keller Visiting Professorship at Harvard University.

Vladimir Gligorov

Vladimir Gligorov is a researcher at the Vienna Institute for International Economic Studies and a lecturer at the University of Vienna. He was previously associated with Columbia University, Belgrade University, the Institute of Economic Sciences, Belgrade, the Center for the Study of Public Choice, George Mason University and Uppsala University, Sweden. His publications include ‘Residue: essays on the advantages of freedom’ (in Serbian and English, 2010); ‘Why do countries break up: the case of Yugoslavia’ (forthcoming, 2010); ‘Neoclassicism in the Balkans: papers on Balkan economics’ (forthcoming, 2011); ‘Causes, rights and choices’ (forthcoming, 2011).

Torbjörn Becker

Torbjörn Becker has been Director of the Stockholm Institute of Transition Economics at the Stockholm School of Economics since August 2006. He is also a board member of the Swedish International Development Cooperation Agency, chairman of the board of the Kyiv Economics Institute (Ukraine) and CenEA in Poland, and a member of the International Faculty Committee at the International School of Economics in Tbilisi. He previously worked for the International Monetary Fund for nine years. He holds a PhD in economics from the Stockholm School of Economics and has also studied at the University of California, Berkeley and Manchester Business School.

Daniel Daianu

Daniel Daianu (born 30 August 1952, Bucharest) is a Romanian economist, professor and politician. He has been a member of the European Parliament since end of 2007, when he was elected on the National Liberal Party's lists.

He was the Finance Minister of Romania between December 5, 1997 and September 23, 1998, in the governments of Victor Ciorbea and Radu Vasile. He was dismissed because he refused to endorse a controversial deal with Bell Helicopter Textron to purchase 96 AH-1RO Dracula attack helicopters (a variant of AH-1 Cobra), in order to help modernize the armed forces. Dăianu considered that terms of the contract were disadvantageous for the Romanian industry and that the deal was too costly for the Romanian budget at that time.

Between 1992 and 1997, Dăianu was the Chief Economist of the National Bank of Romania. In August 2005, he became President of the Supervision Board of Banca Comercială Română, a position previously held by Sebastian Vlădescu and Florin Georgescu, among others. He resigned this post in December 2007, in order to avoid any conflict of interest with his duties as a member of the European Parliament.

Dăianu was also the President of the European Association for Comparative Economic Studies (EACES), between 2002–2004.

In 1975, he obtained a Master in Economics from the Academy of Economic Studies in Bucharest and, in 1988, a Ph.D.in Economics from the same institution. He held a post-doctoral research position at Harvard University's Russian Research Center, during 1990-1991 and completed Harvard Business School's Advanced Management Program in 1994.

Daniel Dăianu is also a professor of public finance, at the National School of Political Studies and Public Administration (SNSPA) in Bucharest. During different periods, he held research positions at the Russian Research Center (Harvard University), the Woodrow Wilson Center (Washington, D.C.), the NATO Defense College (Rome), the International Monetary Fund (IMF), and the Organization for European Cooperation in Europe (OECD). Between 1999 - 2004, he was a professor at the Academy of Economic Studies (ASE) in Bucharest, at the University of California, Berkeley, at the University of California, Los Angeles and at the University of Bologna.

During Nicolae Ceauşescu's communist regime, he worked for the Securitate's Foreign Intelligence Unit (DIE), between 1976 and September 1978. He left DIE in 1978, of his own volition and he became known, in the following decade, for his writings against Ceauşescu's economic policy, which were highlightted on Radio Free Europe (RFE) at the time. In September 2007, the National Council for Analyzing the State Security Department Files (CNSAS) decided that Daniel Dăianu had worked for the External Intelligence Unit solely on economic issues.

Between 1979 and 1990, he was a researcher at the Economic Socialist Institute.

Daniel Dăianu has been a corresponding member of the Romanian Academy since 2001.

He has published several books and his columns appear regularly in Jurnalul Naţional, Ziarul Financiar, Piaţa Financiară, Southeast European Times and European Voice.

In October 2008, Dăianu took position against European banks that receive state aids to get out of the crisis, yet damage emerging European economies through speculation against national currencies.

He was co-rapporteur of the report "Lamfalussy follow-up: Future Structure of Supervision", for the European Parliament.

On May 22, 2008, Daniel Dăianu, together with three former Presidents of the European Commission, nine former Prime Ministers of EU member states and six former Finance / Economy Ministers, co-signed an article with title "Financial Markets Cannot Govern Us" in "Le Monde", in which they anticipated the extent of the economic crisis and talked about its causes.

During the presidential elections of 2009, he was touted as one of possible prime ministers.

Daniel Dăianu was invited to be a fellow of the Warsaw based Center for Social and Economic Research (CASE), in 2010.

He has been a member of the European Council for Foreign Relations (ECFR) since 2011.

Zsolt Darvas

Zsolt Darvas, a Hungarian citizen, joined Bruegel as a Visiting Fellow in September 2008 and continued his work at Bruegel as a Research Fellow from January 2009. He is also Research Fellow at the Institute of Economics of the Hungarian Academy of Sciences and Associate Professor at the Corvinus University of Budapest.

From 2005 to 2008, he was the Research Advisor of the Argenta Financial Research Group in Budapest. Before that, he worked at the research unit of the Central Bank of Hungary (1994-2005) where he served as Deputy Head.

Zsolt holds a Ph.D. in Economics from Corvinus University of Budapest where he teaches courses in Econometrics and but also in other institutions since 1994.

His research interests include macroeconomics, international economics, central banking and time series analysis.

Beatrice Weder di Mauro

Beatrice Weder di Mauro received her doctorate in economics from the University of Basel in 1991. Prior to joining the faculty of Johannes-Gutenberg University in 2001, she was an economist at the International Monetary Fund (IMF). She has held visiting appointments at Harvard University, the National Bureau of Economic Research, the World Bank and the United Nations University in Tokyo. She serves as a consultant, inter alia for the Swiss and Austrian governments. She is a fellow at the Centre for Economic Policy Research (CEPR) and a member of the German Council of Economic Experts. Her current research focuses on the analysis of financial crises, international capital flows, bank governance and growth.

Pavle Petrovic

Pavle Petrovic is a professor of Economics at the University of Belgrade, and the editor of Quarterly Monitor. His main interest is international macroeconomics. He has published in, and refereed for, international journals such as: theJournal of Money, Credit and Banking, the Journal of Development Economics, the Journal ofComparative Economics, the Journal of Macroeconomics, Cambridge Journal of Economics and the European Journal of Political Economy. He was a visiting fellow at Harvard, Princeton and Cornell universities. He was previously President of the Council of the National Bank of Serbia, and assistant finance minister. He is co-founder and director of CES Mecon, a think-tank, where he has led projects on macro-stabilisation and reforms in transition.

Jean Pisani-Ferry

Jean Pisani-Ferry has been director of Bruegel since January 2005. He is also aprofessor of economics with Université Paris-Dauphine.

Pisani-Ferry has made his career in research and policy. After having held positions in research and government in France, he joined the European Commission in 1989 as economic adviser to the Director-General of DG ECFIN. From 1992 to 1997 he was the director of CEPII, the main French research centre in international economics. In 1997, he became senior economic adviser to the French minister of Finance and was later appointed executive president of the French prime minister’s Council of Economic Analysis (2001-2002). From 2002 to 2004, he was senior adviser to the director of the French Treasury.

Pisani-Ferry has held teaching positions with various universities including Ecole polytechniquein Paris and Université libre de Bruxelles. In 2006-2007, he was president of the French economic association.

He is a member of two independent consultative groups: the European Commission president’s Group of Economic Policy Analysis and the French PM’s Council of Economic Analysis.

Born in 1951, Pisani-Ferry was initially trained as an engineer and also holds a Masterin mathematics. He holds an advanced degree in economics from the Centre d'études des programmes économiques (CEPE, Paris).

Pisani-Ferry has a regular column in Le Monde and Handelsblatt.

Dariusz K. Rosati

Dariusz K. Rosati is a professor of international economics at Warsaw School of Economics, from which he graduated in 1969. He is a former Polish Minister of Foreign Affairs (1995-97), and has been a Member of the European Parliament (2004-09), a member of the Monetary Policy Committee, National Bank of Poland (1998-2004), and was head of the Transition Economies Section, United Nations Economic Commission for Europe (1991-95). He has also worked with Citibank in New York and was a Fulbright Scholar at Princeton. He has published extensively, including books on international trade and finance, European integration, economic policy and reforms in transition countries.

André Sapir

André Sapir, a Belgian citizen, is Senior Fellow at Bruegel. He is a Professor of Economics at Université Libre de Bruxelles (ULB) and a former economic adviser to the president of the European Commission. In 2004, he published 'An Agenda for a Growing Europe', a report to the president of the Commission by a group of independent experts that is known as the Sapir report.

André holds a PhD in Economics from The Johns Hopkins University, 1977. At ULB, he holds a chair in international economics and European integration.He is also a Research Fellow of the Centre for Economic Policy Research (CEPR). In addition, he is a member of European Commission President Jose Manuel Barroso‘s Economic Policy Analysis Group.

André is a founding Editorial Board Member of the World Trade Review, published by Cambridge University Press and the World Trade Organisation.